Posts Tagged ‘rates’

What will happen if rates go up? In today’s low-interest-rate environment one of the common questions property investors ask is, “What happens if we buy now and interest rates skyrocket, like back in the 1980’s?”

An understandable concern and today’s historically low interest rates can’t be sustained forever because at some point the economy will begin recovering, inflation will grow and rates will rise!

That’s the economy’s cyclical nature for you.

When rates do rise it’s doubtful they’ll hit the dizzying heights of the late 1980s. The major lenders certainly don’t think so; they’re setting their 10year fixed rates about 7per cent.

With vast resources and access to the world’s top economic minds, it’s highly unlikely that major lenders will make the wrong call about the future direction of interest rates.

But for argument’s sake that they do and rates climb back to the heady levels of 20 years ago.

If interest rates go up that far it’s a sign that business and consumer confidence is high. When rates go up so does inflation. And when inflation rises, so do property values. Sure, your holding costs will be higher because of higher interest rates but as an investor you will benefit on three fronts.

High rental returns

First-home buyers won’t be prowling the property market for a buy as it’s less affordable in a high-interest-rate environment. This will keep them in the rental market, put pressure on the available rental accommodation and drive up asking rents. The higher the interest rates the higher the investment yield!

Negative gearing benefits

If your expenditure on the property exceeds your rental income, you’ll be able to soften the impact and increase your cash flow by claiming the difference as a tax deduction.

Substantial sale proceeds

If you can’t afford to hold the property …sell it. Whilst not an ideal scenario, your property will have grown substantially in value during the time of high inflation so you’ll be better off than when you purchased it and that’s the aim of investing!

Melbourne’s outer suburb vacancy rates have improved from 0.7 per cent to 1.8 per cent in the past six months, according to the Real Estate Institute of Victoria’s April vacancy rates.

Vacancy rates across Melbourne are reasonably steady having been between one and 1.4% for          12 months.  However it‘s significant that there’s a noted improvement in the outer suburbs.

The improvement more than likely due to the number of first homebuyers moving from rented accommodation into their own homes with the assistance of the grants, bonus and boosts.

The March quarter median prices showed that most of the activity in the marketplace has been in the outer suburbs; for instance Craigieburn, Melton South, Hillside, Epping, Caroline Springs, Werribee and Meadow Heights – all outer suburbs of Melbourne very popular with first homebuyers.

It‘s great news for renters if a by-product of the grants, bonus and boosts is an improvement in availability of rental accommodation, however monitoring of the situation over the next few months will tell of any continual improvement..

We’d consider that the rental market would be in balance once we reach a Melbourne-wide vacancy rate of 3%.

The last month’s REIV members figures show a very minor change in the inner suburbs where the vacancy rate moved from 1.5 to 1.3 per cent and in the middle suburbs where it moved from 1.4 to 1.3 per cent.

The value of Aussie homes increased in the first quarter of the year, bucking a global trend downwards!

House and flat prices in Australia increased in value by 1.6% in the first three months of the year, helped by a scarcity of supply, lower interest rates and incentives to first-home buyers.

The slight recovery in Australia “has been driven by the 40% fall in home loan rates down to 5.7%, which are now at their lowest levels since July 1968!”

March’s three-month gain follows a 0.1% rise in the three months to February in the              RP Data-Rismark’s national dwelling value index, and a 3% fall in the value of “cap” city homes in 2008.

The strength of Australian housing prices is a world away - so far - from the 2.7% drop in British home prices over the first quarter, capping a year to March a whopping 17.5% plunge!

US housing didn’t fare too much better either, with prices in the top 20 cities sinking 1.9% in February, which brought the 12-month fall to 18.6%, according to the most recent S&P/Case-Shiller index, a widely followed measure.

RP Data-Rismark said the first-home buyer’s grant, ending June 30th, has acted like a catalyst for new home buying in Australia, but lower interest rates are sustaining the market’s growth.